$GME from the Inside: WSB, the Squeeze and What It Meant

“Listen up, retard”

What??? Did I just call you a retard. No. Hopefully you’re at least paying attention — I’ll explain later — because it matters to the story. If you can’t get past the first sentence, you probably won’t be able to do any first hand analysis to confirm that everything I’m telling you is true. But it is. It’s fine if you want to stop reading, but you won’t get insulted anymore and you’ll miss the story of the $GME squeeze from the inside. It’s only two pages. Focus your attention.

I started trading full-time in early 2020. The old days — — you know — — movie theatres and traveling and basketball. Pre-Covid. Before the dark times. I’m a little different than most people trading, but it doesn’t matter. One of this big lessons that’s already being missed by the media in this whole thing is that you can’t paint retail traders with a broad brush. There’s no hive-mind. There’s no collective. It’s more like a mosh pit. If you’ve never been to a show with a mosh-pit, that’s fine. Just realize this point — like everything in life — there is nuance. Retail traders may see like a mass all going in the same direction, but that’s far from true.

WallStreetBets is a sub-reddit. If you’ve never been on reddit…. It’s just a collection of sub-groups of interest, with just about every unsavory and also wholesome interest on the planet represented. WSB has been around for years, and has major events every few weeks, sometimes more often. At it’s core, it’s a message board, not unlink the BBS’s of the 90’s…. early stage internet technology where people post and interact. That’s the heart. That’s it. There’s no official twitter. There’s no head. There’s a Discord channel (a shared audio space) and the board. There’s a LOT of unofficial stuff. Lots of inside jokes. Lots of cringy stuff. The whole retard thing at the beginning— — that’s one of the main labels people through around… along with autist and a bunch of other extremely insulting stuff. Sailor-language. Gutter talk. Doesn’t matter. If you’re easily offended, this isn’t the space for you.

One particular redditor (forum member) took a position in GameStop many, many moons ago. The stock was down in the $2 range, and he had a high conviction position that the market wasn’t properly valuing the company. He was right. He took a lot of grief for it. You can find the old posts of him getting insulted with every name in the book for throwing away his money. But he held on. His position is worth maybe $30 mil now… from maybe a 50k start.

GameStop’s future can be discussed at another time… but here’s the key facts

1) It was critically mis-managed and the stock traded for almost nothing.

2) Wall Street hedge funds shorted the stock, many times over.

3) Michael Burry (The Big Short, Scion Cap) took a large stake

4) Ryan Cohen (Chewy.com) took a large stake…. And then some board seats.

5) Now the stock is >$300.

When Cohen joined, the whole landscape changed. It’s a story for another paper, but he is a modern day success story, successfully taking on the biggest titan in retail with an upstart company, and winning (Chewy and Amazon). When he got involved, it got serious. And he put skin in the game.

Here’s another fact that media missed. Retail investors aren’t all un-sophisticated. Many, many folks on WSB do global-grade research. They know the SEC search functions and public filings inside & out. As soon as Cohen came on board, his share filing dropped showing his large stake in the company. People ate it up. It was months coming, but the squeeze was on. There was a big pause around $20, a smaller pause around $40, and then….. three days of gee-force inducing market swings culminated with a high just shy of $400.

CNBC of course, couldn’t get enough. Despite Fox and Bloomberg’s best efforts, CNBC has the ear of the retail traders. Jim Cramer has a complicated relationship with WSB, getting meme’d both positively and negatively. But when the squeeze started, the daytime anchors struggled to even understand what was happening, often even mispronouncing the name of the company (It’s not called GameStock, Scott).

So what was happening? The short version is this. Several hedge funds, including the prestigious Melvin Capital, had creating such an enormous short position betting against GME, that there were more shares SHORTED than publicly available. Additionally, once the runup started, the options-activity became enormous. (Quick version — when large funds take options positive they often hedge them with small numbers of shares. If options start to all go radically profitable, they increase the positive). This caused a gamma squeeze. Price went up. As price went up, the shorts started to lose an exponential amount of money. Hence, short squeeze. CNBC reported Melvin covered their short on 1/27, but then it was a global phenomenon. Retail investors from all over the world poured in. At 4 a.m. New York Time the European market saw the share price hit nearly $400. As price went up, short interest went up as well. But as the price increased, shorts had to cover, driving it up even more.

The media started to freak out. Many of the talking heads couldn’t cover their disgust with what was happening. What was happening? Well, two big things. Hedge funds were being threatened with bankruptcy (hey guys, read Taleb, duh). And retail investors were trying to catch the falling knife of stock price. Undoubtedly, many retail investors are going to get burned. However, there are going to be millionaires and deca-millinoaires as well. Twitter couldn’t handle it. CNBC un-covered William Galvin to ramble on about uncertainty and risk. And he’s probably right — a bunch of retail investors are going to probably get burned. Probably. But mostly, his full on nanny-state attitude summed up the condescension of the “established”.

And this is where the rubber meats the road. RobinHood, the most popular brokerage trading app used by retail traders (although there are many), has never been more aptly named. The global story turned into a true story of wealth transfer, except in the direction of wall street, to a bunch folks all over the world. It only takes a second to read about how people paid off medical loans, got out of student debt slavery, or even indulged in a new car (or in my case, booked a trip to Disney, leaving in 24 hours!) with their wins. And there were united voices from the political spectrum sticking up for the average retail trader. Charles Payne on Fox (right) and Chamath Palihapitiya on MSNBC (left) both went to the mat for retail traders. And of course, now CNBC Pro has an article entitled “Wells Fargo recommends buying these highly shorted stocks”. LOL. (If you can’t beat em….)

Like all WallStreet stories, this one has greed as a key player. But who’s the villain? Many in the media would lead you believe that it’s a “coordinated” hit on hedge funds by WSB. They’re asking the wrong questions to the wrong people. What about asking Melvin how leveraged THEY are? How many derivative exotic financial instruments are they engaging in? How many sales people is Goldman sending out when they drop a new IPO? Is any of THAT market manipulation? What about Speaker Nancy Pelosi buying huge bullish options positions in certain companies right before her President takes office? Is THAT insider trading? Manipulative? Hello?

The “elite” are already responding. As I write this, it appears Discord just shut down the WSB Discord (7 p.m. Eastern 1/21).

Supposedly brand new Treasury Secretary Janet Yellen is both confused and irate, according to tweeters. Wall Street Bets made the WH press briefing.

The story isn’t over.

@DollarNacho

DMs Open

To clarify, I’m not giving any financial advice (duh), and the language on WSB is awful. I have family that have MR and it’s despicable. But it’s also the type of language used.